NISM Series XIX-D · Chapter 11: Valuation
L1 · FoundationValuation Foundations - Bonds, Businesses and Assets
Why present value sits under every valuation, how a bond is valued with the PVA and PV factors, the three approaches to business valuation, the difference between Enterprise Value and Equity Value, and the three asset-based methods - book value, replacement cost and break-up value.
28 min read · Worth 10% of the paper · Written from pages 255–281 of the official NISM workbook · Updated 18 September 2026
Valuation Foundations
11.1 The one idea underneath everything
Valuation of assets and businesses is essential to financial investments in businesses, financial markets and more specifically in alternative investments. Several approaches exist, but the most acceptable by theoretical standards is the one that estimates the value of an asset as the present value of its future cash flows.
In theory, the value of any financial investment is the Net Present Value of its future cash flows. This is the Discounted Cash Flow (DCF) method:
Value of Asset = Sum of Future Cash Flows / (1 + r)^n
where r is the applicable discounting rate and n is the number of periods over which the discounting rate is applied.
The honest caveat the workbook gives immediately: though DCF appears to be a straightforward calculation, it is fraught with difficulty. It is extremely sensitive to the timing of any cash flow - the difference between receiving a cash flow at the start or the end of the year has a material impact on NPV.
And how the other methods relate to it: there are asset based valuation, relative valuation and market-based valuation, but these approaches are used more to corroborate the fundamental value derived from cash flow based valuation. They are the cross-check, not the answer.
11.2 Valuing fixed income instruments
Why an AIF professional needs this. Fixed income valuation is relevant to AIFs for three reasons:
(a) AIFs floated as debt funds could invest in debt securities of investee companies and other entities such as SPVs, InvITs and REITs (b) AIFs use debt structures in financing investee companies - either as a complementary structure to equity financing, or as convertibles that become equity after set milestones are reached (c) AIFs may invest in debt securities in the listed or unlisted space to manage the risk profile and liquidity of the scheme
The formula
Value = I x PVA(r, n) + F x PV(r, n)
where I is the annual interest payable on the bond, F is the principal amount (par value), r is the required return, and n is the maturity period.
The two factors, defined:
| Factor | Formula | What it does |
|---|---|---|
| PVA - Present Value Annuity Factor | PVA(n, r) = (1 - (1 + r)^-n) / r | Converts a stream of equal future amounts into one present value |
| PV factor | 1 / (1 + r)^n | Converts a single future amount into its present value |
Both can be computed on a calculator or spreadsheet, or looked up in annuity factor tables and discounting factor tables.
Illustration 11.1
A Rs 100 par value bond, annual coupon 12 per cent, maturing after 8 years. Required rate of return 14 per cent.
Annual interest = Rs 12 for 8 years; principal repayment Rs 100 at the end of year 8.
PVA(14%, 8) = (1 - 1.14^-8) / 0.14 = 4.639 PV factor(14%, 8) = 1 / 1.14^8 = 0.351
V = 12 x 4.639 + 100 x 0.351 = 55.67 + 35.10 = Rs 90.77
In a spreadsheet: =PV(14%, 8, 12, 100) - where rate is the required return, Nper the tenure, Pmt the coupon payments, and Fv the future value of the bond.
Read the answer, not just the arithmetic. The bond pays 12 per cent but the market demands 14 per cent, so it must sell below par - at Rs 90.77. Price falls until the yield rises to what the market wants.
Illustration 11.2
A Rs 1,000 par value bond, annual coupon 14 per cent, maturing after 5 years. Required rate of return 13 per cent.
Annual interest = Rs 140 for 5 years; principal Rs 1,000 at the end of year 5.
V = 140 x PVA(13%, 5) + 1,000 x PV(13%, 5) = 140 x 3.517 + 1,000 x 0.543 = 492.38 + 543.00 = Rs 1,035.4
Here the coupon of 14 per cent exceeds the required 13 per cent, so the bond trades above par. Spreadsheet: =PV(13%, 5, 140, 1000).
The rule to carry away: coupon below required return means price below par; coupon above required return means price above par. It is the same maths in both directions.
11.3 Equity valuation - and why the dividend model does not work here
The same present-value approach can estimate the value of an equity share using the present value of its expected dividend cash flow.
But this has limited relevance for alternative investments. The workbook gives three reasons:
- AIF investments are primarily made in unlisted companies that have high growth potential
- the emphasis is not on distribution of profits but to generate high valuation with internal growth
- many such investee companies may also lack sufficient distributable surplus
Therefore there is a need to look at the valuation of the BUSINESS of the investee company, in order to arrive at the valuation of its share. That is the pivot from share valuation to business valuation, and everything after this point follows from it.
11.4 The three approaches to business valuation
| Approach | Also called | Basis |
|---|---|---|
| Earnings approach based on DCF analysis | Income approach | Future expected earnings, discounted |
| Relative valuation based on earnings multiples | Market approach | What comparable companies trade or transact at |
| Asset based approach | Cost approach | The assets the business owns |
Which one wins, and why. The income or earnings based approach often scores over the other methods, because the cost approach does not consider some critical drivers of value that the income approach does.
But each has a weakness, and the workbook states all three:
- The income approach has several judgemental factors and assumptions to be made, which make it quite subjective.
- Relative valuation is tricky since it requires comparing "an apple to an apple". The valuation could be misleading if comparable data is not available. When business models are unique or comparable data is not available, the relative valuation approach may not be appropriate - which is exactly the situation with most start-ups.
- The asset based approach is not considered by many as an independent method.
The full map of approaches
| Family | Method | What it does |
|---|---|---|
| Income or Earnings | DCF | Uses future expected earnings to measure the Free Cash Flow of the company. Value can be estimated using firm cash flow or equity cash flow, discounted appropriately |
| Earnings capitalisation | An alternative to DCF, though DCF methodology is more comprehensive | |
| Economic Profit | Uses the economic profit of a company in a given period; value is the sum of the present capital employed and the present value of the projected economic profit for the future | |
| Other | Relative Valuation | Uses different types of market multiples - either trading multiples or prevailing transaction multiples |
| Contingent Claim Valuation | Uses option pricing models in cash flow based valuation to factor in embedded real options | |
| Asset based Valuation | Uses existing assets as a base; not considered by many as an independent method |
11.4.1 Enterprise Value versus Equity Value
This distinction must be secure before any method makes sense.
Enterprise Value (EV) is the debt-free / cash-free value of the operating business. It is measured with reference to the earning potential (gross operating cash flow), which in profit terms refers to EBITDA, and it reflects the estimate of the value of the business regardless of how it is financed. So EV is the value of the total capital in the company, regardless of whether it is debt or equity capital.
Equity Value - market capitalisation in a listed company - is the value of 100 per cent of the shares of the company. It measures the total value of funds belonging to equity shareholders after all others, including debt and preference capital, have been deducted.
The relationship:
Enterprise Value = Equity Value (Market Cap) + Total Debt (net of cash) + Preference capital (if any)
Illustration 11.3
| Item | Amount |
|---|---|
| Estimated market cap | Rs 1,000 crore |
| Long term debt | Rs 200 crore |
| Outstanding preference capital | Rs 50 crore |
| Cash on the balance sheet | Rs 5 crore |
Enterprise Value = 1,000 + (200 - 5) + 50 = Rs 1,245 crore
Note the "net of cash". Debt is taken at Rs 195 crore, not Rs 200 crore, because the company's own cash could extinguish part of the debt. A buyer acquiring the company inherits the cash too.
Why this matters practically: relative valuation methods determine the Enterprise Value. In order to arrive at the Equity Value, the book value or market value of outstanding debt has to be deducted from the Enterprise Value. Forgetting that deduction is one of the commonest valuation errors.
11.5 Asset based valuation
The method: the value of the equity share is arrived at as the "net asset value" per share - total net asset value divided by the number of outstanding shares.
Its defining limitation: this method does not take into account any future value attributable to the business and considers only the market value of the assets less liabilities.
The three approaches within it
1. Book Value or Net Asset Value approach. All assets and liabilities as on the valuation date are considered at historical carrying cost in the books. If they are taken only at balance sheet values (historical cost), we arrive at the book value per share.
Its role: book value per share is normally considered the "floor price" or the least value attributable to a going concern business which is expected to continue in business in future.
Book Value per Share = Equity Shareholders' funds as per balance sheet / Number of equity shares issued and paid up
2. Replacement Cost approach. The value of the business is estimated at the cost of replacement of the entire business on an as-is-where-is basis. The market cost of assets and liabilities with suitable adjustments for their current position is taken. In addition to the cost of acquisition of assets, the costs related to establishment of the business as a going concern in its present state are considered.
When it is appropriate: for businesses that have high entry barriers or setting up costs.
3. Break-up Value approach. This considers the salvage value of a business if it were shut down on the valuation date. It measures the current market value of the company if it is broken up and sold in individual pieces of assets.
When it is used: to value a company that is in distress or does not have a future business case.
Break-up Value per Share = (Liquidation Value of Assets - Settlement Value of Debt) / Number of equity shares issued and paid up
Illustration 11.4 - Alpha Ltd, all three at once
The balance sheet (Rs):
| Liabilities | Amount | Assets | Amount |
|---|---|---|---|
| Equity Share Capital | 1,00,000 | Fixed Assets | 1,20,00,000 |
| General Reserve | 50,00,000 | Investments | 10,00,000 |
| Revaluation Reserve | 15,00,000 | Inventory | 35,00,000 |
| Capital Redemption Reserve | 25,00,000 | Receivables | 25,00,000 |
| Debenture Redemption Reserve | 20,00,000 | Intangible Assets | 10,00,000 |
| P&L Surplus | 5,00,000 | ||
| Long Term Debentures | 40,00,000 | ||
| Bank borrowings | 30,00,000 | ||
| Trade Payables | 10,00,000 | ||
| Other Current Liabilities | 4,00,000 | ||
| Total | 2,00,00,000 | Total | 2,00,00,000 |
Shares outstanding: 10,000.
Further information:
- Current market value of fixed assets would be 10 per cent lower on a going concern basis; if scrapped they would fetch 40 per cent of book value
- Inventory would cost 10 per cent higher in the market; receivables would fetch 25 per cent lower than book value on liquidation; market value of payables would be 15 per cent lower on liquidation
- An additional Rs 20,00,000 as setting up costs for initial licences, registrations, approvals and pre-operative costs
- Intangible assets are trademarks and patents which would fetch Rs 5 lakh more if sold
I. Book Value
| Item | Amount |
|---|---|
| Equity Capital | 1,00,000 |
| General reserve | 50,00,000 |
| Capital Redemption Reserve | 25,00,000 |
| Debenture Redemption Reserve | 20,00,000 |
| Surplus in P&L account | 5,00,000 |
| Total cash net worth | 1,00,00,000 |
| Tangible net worth (Equity Value of the business) | 1,01,00,000 |
| Number of shares | 10,000 |
| NAV per share | Rs 1,010 |
The critical exclusion: cash net worth does not include the revaluation reserve. Hence it is excluded from valuation. A revaluation reserve is an accounting write-up, not money the company has earned or received - including it would double-count the asset appreciation.
II. Break-up Value
| Item | Amount |
|---|---|
| Tangible net worth (from above) | 1,01,00,000 |
| Add appreciation in stock and intangible assets, and reduction in payables (3.5L + 5L + 1.5L) | 10,00,000 |
| Less depreciation in scrap value of fixed assets and receivables (72L + 6.25L) | 78,25,000 |
| Break-up value of business (Equity Value) | 32,75,000 |
| Number of shares | 10,000 |
| Break-up value per share | Rs 327.50 |
Check the components: inventory up 10 per cent of 35,00,000 = Rs 3.5 lakh; intangibles up Rs 5 lakh; payables down 15 per cent of 10,00,000 = Rs 1.5 lakh. On the other side, fixed assets fetch only 40 per cent, so the loss is 60 per cent of 1,20,00,000 = Rs 72 lakh; receivables down 25 per cent of 25,00,000 = Rs 6.25 lakh.
III. Replacement Value
| Item | Amount |
|---|---|
| Book Value of Assets | 2,00,00,000 |
| Add appreciation in stock and intangibles (3.5L + 5L) | 8,50,000 |
| Add additional setting up costs | 20,00,000 |
| Less depreciation in fixed asset value on going concern basis (10% of 1,20,00,000) | 12,00,000 |
| Replacement Value of business (Enterprise Value) | 2,16,50,000 |
The three answers side by side
| Method | Value | What it answers |
|---|---|---|
| Book value | Rs 1,01,00,000 (Rs 1,010/share) | What the balance sheet says the owners' funds are - the floor price for a going concern |
| Break-up value | Rs 32,75,000 (Rs 327.50/share) | What would be left if we shut it down today and sold the pieces |
| Replacement value | Rs 2,16,50,000 | What it would cost to build this business again from scratch |
Note the labels carefully: book value and break-up value give Equity Value; replacement value gives Enterprise Value. Mixing them up is a standard exam trap.
And note the spread. The same company is worth Rs 32.75 lakh, Rs 1.01 crore or Rs 2.17 crore depending on which question you ask. Valuation is not a number; it is an answer to a specific question.
Where asset based valuation belongs
It is not considered an independent method. When employed, it would more often than not be used in conjunction with other methods, assigning appropriate weightage based on its overall importance in the given valuation context.
It is most appropriate for:
- asset heavy businesses
- distressed companies facing liquidation
- financial businesses such as banks and financial or investment companies
Think of it like this
Present value is the discount for waiting
If a cousin offers you Rs 1 lakh today or Rs 1 lakh after three years, you take it today - not because you distrust him, but because money today can earn. Everything in this chapter is an elaboration of that instinct. The discount rate is simply how much you charge for waiting, and the PV factor is the price tag on the delay.
A bond below par is the FD that pays less than the bank
Your neighbour wants to sell you his old fixed deposit receipt paying 12 per cent when new FDs pay 14. He cannot sell it at face value - nobody would buy. He must knock the price down until your effective return reaches 14 per cent. That is exactly why the Rs 100 bond in Illustration 11.1 is worth Rs 90.77. And when his old FD pays 14 while the market pays 13, he gets a premium - Rs 1,035 for a Rs 1,000 bond.
Enterprise Value is the price of the shop, equity value is what the owner pockets
A shop sells for Rs 1 crore. The owner owes Rs 30 lakh to the bank and has Rs 5 lakh in the till. The buyer pays Rs 1 crore for the business; the owner walks away with Rs 75 lakh after clearing the loan and keeping the cash. Enterprise Value is the whole shop irrespective of who financed it; equity value is the owner's share once the lenders are paid.
Book, break-up and replacement value are three questions about the same house
What did I pay for this house and what do the papers say it is worth? That is book value. What would I get if I demolished it today and sold the steel, wood and fittings? That is break-up value. What would it cost me to buy this plot and build this same house again, including the approvals and the architect? That is replacement value. Same house, three completely different numbers - and each answers a different question.
The revaluation reserve is the property you revalued but never sold
A family says it is worth Rs 5 crore because the ancestral land was revalued last year. No money changed hands; a valuer wrote a number. That is why the workbook excludes the revaluation reserve from cash net worth - counting it would mean valuing the asset once in the balance sheet and again in the reserves. Only earned reserves and paid-in capital count.
Replacement cost is why the old factory is worth more than its accounts say
A cement plant with every licence, environmental clearance and land acquisition already done is worth far more than the depreciated value of its machinery - because a rival would spend years and crores obtaining the same approvals. That is precisely why the replacement cost method is appropriate for businesses with high entry barriers or setting-up costs, and why Alpha Ltd adds Rs 20 lakh for licences and pre-operative costs.
Break-up value is what the scrap dealer offers
When a textile mill shuts, the scrap dealer does not pay for the brand, the customer list or the order book. He weighs the machinery. Break-up value measures exactly that - the current market value of the company if it is broken up and sold in individual pieces - which is why it is used for a company in distress or without a future business case. Alpha Ltd fell from Rs 1,010 a share to Rs 327.50 on precisely this logic.
Relative valuation needs apple to apple, and start-ups are not apples
You can price a second-hand Swift because a hundred identical Swifts sold last month. You cannot price a hand-built prototype the same way. The workbook says relative valuation requires comparing an apple to an apple, and that when business models are unique or comparable data is unavailable, the approach may not be appropriate - which is the situation for most of the companies a Category I or II AIF actually buys.
Key terms in this chapter
- Adjusted NAV of a fund
- The value of a fund such that it equals the cash investors would receive as if all underlying portfolio assets were realised at the valuation date - the proportionate distributable NAV after taxes and statutory payments, outstanding fees and expenses, carried interest and other contractual deductions.
- Bond valuation formula
- Value = I x PVA(r, n) + F x PV(r, n), where I is the annual interest, F the par value, r the required return and n the maturity period. A coupon below the required return prices the bond below par, and above it prices the bond above par.
- Book value per share
- Equity shareholders' funds as per the balance sheet divided by the number of equity shares issued and paid up, taking assets and liabilities at historical carrying cost. It is normally considered the floor price or least value attributable to a going concern business.
- Bottom-up (sum of parts) fund valuation
- Fund NAV computed as the sum of the estimated fair value of the underlying portfolio investments as on the valuation date, added from the bottom to the top.
- Break-up value approach
- The salvage value of a business if it were shut down on the valuation date - the current market value of the company if broken up and sold in individual pieces. Used for a company in distress or without a future business case.
- Churn Rate
- The percentage of customers who discontinue using a product or service over a given period - crucial to confirming that the investee company operates in a sustainable business environment.
- CLTV/CAC ratio
- The ratio of customer lifetime value to customer acquisition cost, used to compare two companies in the same industry.
- Contingent claim valuation
- An approach that uses option pricing models within cash flow based valuation, in order to factor in embedded real options.
- Contribution Margin After Marketing
- Revenue per order less variable costs per order and also less direct marketing expenses, giving a more efficient analysis of unit economics and of control over marketing spend.
- Cost approach (asset based valuation)
- Valuation using existing assets as a base, arriving at net asset value per share. It does not take into account any future value attributable to the business, and is not considered by many as an independent method.
- Cost of equity for an unlisted company
- Usually based on CAPM but adjusted to reflect the illiquidity premium of alternative assets and any further specific risk premium - which is why it will always be higher than that of a comparable listed company.
- Customer Lifetime Value (CLTV)
- Total revenue generated from a customer over the entire relationship, computed as the average purchase value of customers multiplied by the average number of purchases made by them.
- Deal Comps (earnings based multiples)
- Transaction comparables - most commonly the EV/EBITDA multiple and the EV/Sales or EV/Revenue multiple, the latter known as the topline multiple.
- Discounted Cash Flow (DCF)
- The method that values an asset as the present value of its future cash flows - theoretically the most acceptable approach, though extremely sensitive to the timing of any cash flow, since receiving a flow at the start rather than the end of a year materially changes the NPV.
- Economic profit approach
- A business valuation approach defining value as the sum of the present capital employed and the present value of the projected economic profit for the future.
- Enterprise Value (EV)
- The debt-free and cash-free value of the operating business, measured with reference to EBITDA and reflecting the value of the business regardless of how it is financed. It is the value of total capital in the company, whether debt or equity.
- Equity Value
- The value of 100 per cent of the shares of a company - market capitalisation in a listed company - measuring the funds belonging to equity shareholders after debt and preference capital have been deducted.
- EV/EBITDA multiple
- Value of firm divided by EBITDA; the higher the multiple, the higher the value of the company. Preferred because EBITDA measures operational efficiency, and because it still works where EBITDA is positive but PAT is negative due to heavy interest, depreciation and amortisation.
- EV to Equity Value relationship
- Enterprise Value = Equity Value + Total Debt (net of cash) + Preference capital, if any. Cash is netted against debt because the acquirer inherits the company's cash.
- Exclusion of the revaluation reserve
- Cash net worth does not include the revaluation reserve, which is an accounting write-up rather than earned or paid-in funds; including it would double-count the appreciation already reflected in the asset.
- Fair value
- Internationally, the arm's length price agreed between a willing buyer and seller who are not connected. Under IND-AS 113, the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
- Illiquidity discount on quoted ratios
- The discount normally applied to a quoted market ratio when it is used to value unlisted stock; the discount may be reduced if the fund manager believes an exit to be imminent.
- Income or earnings approach
- Business valuation using future expected earnings to measure free cash flow, discounted appropriately - the DCF method. It often scores over other methods because the cost approach does not consider some critical drivers of value, but it carries several judgemental factors and assumptions that make it subjective.
- Independence of NAV calculation
- Every AIF must ensure that calculation of the Net Asset Value is independent from its fund management function; NAV on each Valuation Day is disclosed to investors quarterly for closed-ended AIFs.
- Independent valuer eligibility
- Not an associate of the manager, sponsor or trustee; at least three years of experience in valuation of unlisted securities; and either IBBI registration with ICAI, ICSI, ICMAI or CFA Institute membership, or being a holding company or subsidiary of a SEBI-registered Credit Rating Agency.
- IPEV Valuation Guidelines
- The International Private Equity and Venture Capital Valuation Guidelines - principles-based, globally acceptable recommendations for valuing unlisted equity investments, whose central theme is that fair value is the best measure at both portfolio and fund level.
- ISIN-wise NAV upload
- AIFs, through their RTAs, must upload the latest NAV against each ISIN of AIF units in the depository system before 1 May 2026 or within 30 days from the date of valuation of the investment portfolio, whichever is later, with the Manager responsible for accuracy and timeliness.
- Market approach (relative valuation)
- Valuation based on standardised multiples derived from comparable companies or transactions. It requires comparing an apple to an apple and may be inappropriate where business models are unique or comparable data is unavailable.
- Negative book value in start-ups
- Start-ups raise equity at a premium shown in reserves, giving a positive initial net worth; sustained losses then wipe out the reserves and may erode even the nominal value of subscribed capital, so book value per share can turn negative even while the company raises at high valuations.
- Net Promoter Score (NPS)
- A measure of customer satisfaction and loyalty, calculated by subtracting the percentage of customers answering 6 or lower (detractors) from the percentage answering 9 or 10 (promoters). Those answering 7 or 8 fall in neither group.
- Net worth (for P/BV)
- Net Fixed Assets plus Long Term Investments plus Net Current Assets minus Long Term Liabilities; alternatively, shareholders' funds, being share capital plus accumulated reserves.
- Non-financial multiples
- Industry-specific measures used for early-stage, technology or service businesses - GMV (gross merchandise value) in e-commerce, ARPU (average revenue per user) in telecom, and ARR (average room revenue) in hotels.
- Operating Cash Flow (OCF)
- PAT plus depreciation, plus or minus non-cash charges in the P&L account, plus or minus changes in working capital. Depreciation is added back because it is a non-cash item appearing in the P&L.
- Option Pricing Method (OPM)
- A forward-looking early-stage valuation method that considers the current equity value and allocates it across the various classes of equity using a continuous distribution of outcomes, rather than distinct future scenarios.
- Post-money valuation
- Pre-money valuation plus the potential investment to be made, reflecting the overall worth of the company including the new money, and determining the ownership percentages of the AIF, the founders and early investors after the round.
- Post-tax cost of debt
- The pre-tax borrowing cost multiplied by (1 - tax rate), reflecting the tax shelter provided by the interest paid on the loan.
- Pre-money valuation
- The estimated value of a start-up immediately before it receives external funding, based on existing assets, IPR, market size and team expertise. Used with the investment amount to calculate the investor's post-round ownership stake.
- Present Value Annuity Factor (PVA)
- The factor that converts a stream of equal future amounts into a single present value, computed as (1 - (1 + r)^-n) / r.
- Present Value (PV) factor
- The factor that converts a single future amount into its present value, computed as 1 / (1 + r)^n.
- Price of previous transaction method
- Where a follow-on investment prices the company, that price becomes the implied market value applicable to the entire investment; the first investment is carried at cost and revised thereafter based on follow-on pricing.
- Price to Book Value multiple
- Market value or firm value divided by net worth, showing how many times book value a company is valued at. In listed companies 4 to 5 times book is considered healthy; the multiple cannot be used where book value is negative.
- Price to Earnings multiple
- Current market price divided by earnings per share, used extensively for listed stocks and sometimes to compare unlisted companies in the alternative space with their listed peers.
- Regulation 23 valuation fallback
- Securities with no valuation norm under the SEBI (Mutual Funds) Regulations are valued per guidelines endorsed by an AIF industry association representing at least 33 per cent of SEBI registered AIFs, endorsed after taking into account recommendations of SEBI's Alternative Investment Policy Advisory Committee (AIPAC).
- Reinvestment requirements
- On-going capital expenditure and working capital investments required in any business, which are subtracted from operating cash flow, along with any long-term debt repayments, to arrive at free cash flow.
- Replacement cost approach
- Valuing the business at the cost of replacing the entire business on an as-is-where-is basis - market cost of assets and liabilities plus the costs of establishing the business as a going concern in its present state. Appropriate for businesses with high entry barriers or setting-up costs.
- Terminal growth rate (g)
- Normally taken at 2 to 3 per cent above the inflation rate for consolidated industries, with higher rates justified in high growth or sunrise industries. It influences the value of shares almost all by itself in young companies, which is why it matters so much for VC and PE valuations.
- Terminal value
- The value to perpetuity of the free cash flow accruing after the forecast period, computed as FCF(T+1) divided by (WACC - g), where g is the expected growth rate of PAT after the discrete period.
- Trading Comps (market based multiples)
- Multiples drawn from quoted market prices - most commonly the Price-Earnings ratio and the Price-Book Value ratio. They are quite unsuitable for unlisted companies, which lack market price validation.
- Valuation deviation triggers
- At each asset level, a deviation of more than 20 per cent between two consecutive valuations, or more than 33 per cent in a financial year, obliges the Investment Manager to inform investors with both generic and specific reasons.
- Valuation of non-performing collateralised debt
- Valued on the basis of the value of the underlying collateral, the risk of converting that collateral into cash, and the time required to convert it into cash.
- Viral Coefficient
- The degree of exponential growth from referrals, derived from referrals sent per user, the conversion rate of those referrals and the total number of current users.
- Weighted Average Cost of Capital (WACC)
- The discount rate in a DCF, computed by taking the post-tax cost of debt and the cost of equity separately and weighting them by the debt and equity proportions of the capital structure.
Check you have understood it
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Create a free accountOriginal explanatory writing based on the official NISM workbook for Series XIX-D, which is published and copyrighted by NISM. Check figures against the current edition at nism.ac.in.